Payday Loans &Credit Cards

CENTS

What is a Payday loan?

A Payday loan is a small loan, also known as a “cash advance.” These loans typically become due in 14 days - your next payday.

When taking out a payday loan, lenders require a check for the full balance of the loan (including interest and fees) that may be cashed when the loan is due.

Each state places different regulations and limits on Payday lenders. *Washington state regulations

Federal law also requires lenders disclose finance charges and APR in writing

Payday Loan:Regulations & Limitations

Washington State: Payday loan limit: $700 or 30% of your gross monthly income,

whichever is less 8 payday loans in a 12-month period Installment plans are available if you cannot repay the balance,

but you must notify the lender before the loan becomes due. Lenders may not harass or intimidate in order to collect the loan Max loan term: 45 days Max fee: 15% for first $500 and 10% for amounts above $500 Payday lenders (store and internet) must be licensed by

Washington’s DFI. Verify a payday lender’s license with the DFI before doing business with a payday lender.

1-877-RING-DFI https://fortress.wa.gov/dfi/licenselu/dfi/licenseLU/LicenseLLU.aspx

Payday Loan:Regulations & Limitations continued

Federal: Truth in Lending Act (TILA)

Lenders must disclose to consumers in writing: Any finance charges Annual Percentage Rate (APR)

Payday Loans & Credit Cards:Key Terms and Definitions

Principal: Original amount borrowed or the value of the loan excluding

any associated interest and fees

Interest Rate: Percentage of the principal charged by a lender to borrow

money.

Simple (basic) Interest: The interest accrued on the original principal only. Calculated: principal x interest rate x # of periods

Average Daily Balance (ADB): *used by most credit cards Calculation to determine the interest rate on the loan balance Taking the sum of your account balance each day, divided by #

of days in the billing cycle.

Payday Loans & Credit Cards:Key Terms and Definitions cont.

Annual Percentage Rate (APR): interest rate calculated on a annual basis – the yearly cost of the loan. Credit Card Example: a credit card has an APR of 14%, the monthly

interest rate would actually be 1.167% (14% ÷ 12 months = 1.167%) Payday loan example:

Loan amount: $500 Fee: 15% on $500 = $75 Loan term: 14 days APR on 14 day loan: 391% How is this calculated?

15% interest (fee) is divided by 14 days = 1.0714% interest per day 1.0714% interest per day x 365 days in a year = 391% APR (annual interest

rate per year)

Payday loan Renewals (rollovers): extending the date the payday loan is due for an additional fee. *Washington state does not allow payday loan rollovers. Example of costs of a rollover: ($200 loan + 1st term interest + rollover fee) x

interest on rollover period

Payday Loans & Credit Cards:Key Terms and Definitions cont.

Compound Interest: the interest earned on the previous term’s principal plus interest. Example: $100 loan with an annual compound

interest rate of 10%. After 2 years what would your interest be? 1st year: $100 x 10% = $10 interest 2nd year: $110 (loan + 1st year interest) x 10% = $11 Total owed: $121 ($100+$10+$11)

Compound Interest:How does it work?

Credit cards are a prime example of where you will see compound interest at work. Why?

Because the interest charges on the balance for the current billing cycle likely includes interest from the previous billing cycle – the interest is compounding!

Using an Average Daily Balance calculation Example:

$300 balance (purchases plus interest from previous billing cycle)

18% APR 31 day billing cycle ADB Calculation: $300 x .18 x 31/365 = $4.59 interest

New balance owed: $304.59

Late Fees & Penalties

Credit card companies love late fees and penalties.

One of the harshest penalties for late payments is seeing a dramatic increase in the APR on your credit card and it will also usually include a fee for the late payment. Example: if you have a credit card with a 15% APR

and you miss a payment, the credit card company could apply a penalty and change your APR to a much higher rate, such as 24%

Late fees are typically $35 per occurrence

High Cost of Minimum Payments:

Minimum payments will increase both the number of payments and total interest owed.

Making minimum payments are not effective in reducing your debt.

Holding large amounts of debt over time can affect your credit score.

Take a good look at your credit card statement! Minimum Payment Warning:

Shows how costly minimum payments can be over time

High Cost of Minimum Payments:Example

Credit Card Example: Minimum v. larger payment Credit Card Balance: $14,700 APR: 15.24%

Minimum Payment: $318 would take 24 years to pay off You will pay $$32,274

More than Minimum: $512 3 years to pay off You will pay $18,430

Common Mistakes:Credit Cards

Having too many credit cards

Failing to read the fine print: Interest rates and when they can change Fees and penalties

Being lured in by low introductory rates and not noticing the change

Cash Advances: come with fees and significantly interest rates

Making only minimum payments

Late payments

Not checking your monthly statements: Limits, APR changes, incorrect/fraudulent charges, balance

Making unnecessary charges: Impulse purchases and small purchases that could have been paid for in

cash

Common Mistakes:Payday loans

Borrowing more than you need or can afford to pay back

Borrowing from more than one lender

Failing to repay the loan on time

Not seeking out alternative ways to borrow money Friends, family, etc.

Best Practices

Establish a savings account or emergency fund

Monitor your statements

Shop around

Work with credit card companies to reduce interest rates

Transfer balances from high rate cards to lower rate cards

Make more than the minimum payment

Make a budget

Only charge what you can pay off each month

Questions?